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Refined product demand under pressure in Europe

By: Harry Altham, Energy Analyst, Market Analysis EMEA & Asia

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Refined product demand under pressure in Europe
 
Harry Altham
Energy Analyst, EMEA & Asia
harry.altham@stonex.com

Oil is set for a weekly gain, as tight supplies (particularly in Europe) and slightly more dovish comments from Jay Powell lend support to benchmark prices. President Macron meets with Saudi Crown Prince Mohammed bin Salman in Paris today, at the same time as the United States announces it is optimistic that OPEC will increase its output quotas beyond September.

  

PMI DATA SUGGESTS EUROPEAN REFINED PRODUCT DEMAND IS WOBBLING
Having reported that United States gasoline demand is feeling the pinch, emerging data from the United Kingdom is suggesting a similar decline. The average quantity of diesel sold per day in the U.K. stands at 8,761 litres, which is almost 600 litres per day less than had been sold in January 2022. Comparison with January is appropriate for a number of reasons: the U.K. was experiencing limited COVID restrictions, January typically sees the lowest fuel demand per month in the U.K., and it falls just before a demand spike in the wake of Russia’s invasion of Ukraine. Distillate consumption data in Europe and Asia tends to arrive with very lengthy delays, but manufacturing PMI and distillate consumption are highly correlated; this can provide us with early indications as to diesel consumption trends across Europe. Across the Euro area, we have seen PMI growth reducing throughout this year, and it fell below 50 for the first time since November 2020 in data released earlier this month. This tells us that economic activity, and almost certainly diesel demand, is falling on the Continent. 
image 45139
Europe manufacturing PMI. Source: S&P Global, Bloomberg.

This trend should eventually see gasoil stockpiles replenish somewhat in Europe’s ARA region. And yet, this is currently not the case. Gasoil stockpiles have fallen by another 217k bbl this week and continue to languish near eight-year lows. However, a major factor here is the low water level in the River Rhine, which stands 50% lower than it had six weeks previously at a critical entry point in Northern Germany. This is severely limiting the flow of oil into and out of refineries along the Rhine. Based on the assumptions that water levels will rise in the Autumn (although no rain is currently forecast in Central Europe) and demand will continue to waiver, we expect to see a structural weakening of the gasoil forward curve, early signs of which we have started to witness over the last seven days. 

europe to face the ultimate test this winter
European natural gas prices are close to touching the highs seen in the immediate aftermath of Russia’s invasion of Ukraine, as Gazprom continues to restrict the flow of gas via Nord Stream 1 (which is now at 33mcm/d, or 20% of capacity). Prices have topped €205/MWh for Dutch TTF spot delivery this week (close prices), as uncertainty grows over Europe’s supply of gas for the coming winter. The United Kingdom has a large quantity of LNG inventory, as well as full gas tanks, but is unable to export to Europe as it is oversupplied with LNG and cannot find ships to export it out of its ports. Europe has now broadly agreed a deal to target a 15% reduction in gas use across the bloc, although disagreements among member states have resulted in some exemptions. Should the current situation continue, prices could well shoot higher as we approach the winter – particularly as China has yet to purchase the bulk of its LNG ahead of the colder months. Europe’s best bet may be to hope that the forthcoming winter is as mild as there has been in recent memory. 
 
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